Woolies pushes its trolley too fast

The biggest threat to
Woolworths
’ long-term growth may not be arch rival
Coles
or fast-growing Aldi but competition tsar
Rod Sims
.

The mild-mannered former economic adviser has Australia’s largest retailer in his sights as the competition watchdog attempts to clamp down on the “creeping acquisitions" that have enabled Woolworths and Coles to control more than 70 per cent of the grocery market between them.

Over the past six years, Woolworths has grown its store network faster than any of its rivals, opening at least 117 supermarkets and 314 liquor shops.

As part of his strategy to “extend and defend" Woolworths’ leadership in food and liquor, chief executive Grant O’Brien plans to open another 87 supermarkets and 107 liquor shops by 2016 through a combination of acquisitions and greenfield developments.

However, Sims has warned Woolworths that more acquisitions and greenfield developments will come under scrutiny and it will take longer to assess them after the retailer refused to agree to Sims’ plan for a new, streamlined assessment process.

Under the proposed regime, the Australian Competition and Consumer Commission offered to guarantee an expedited assessment process for the acquisition of existing stores and development sites as long as Woolworths and Coles notified the commission of all plans up front.

Coles has conditionally agreed to the plan for single supermarkets and new supermarket developments, but has drawn the line at liquor shops.

Woolworths has point blank refused to come to the party, arguing the plan should apply to all retailers and should be based on a demonstrated case.

Related Quotes

Company Profile

Woolworths has attracted the ACCC’s attention because it has more aggressive new store growth plans than Coles.

Over the past few years, Coles has been focusing on improving the productivity of its existing store network, offsetting new store growth by closing underperforming stores. Coles is preparing to expand its network this year but has not clarified its growth ambitions.

A war of words has now broken out between Woolworths and the ACCC. Sims has accused Woolworths of being “ideological rather than practical" and wanting to be “left alone" to pursue its growth plans, unhindered by regulatory intervention or concerns over its growing market share.

“They reject the notion they have market power and therefore they reject the notion they should be singled out – that’s the ideological issue at the heart of this," Sims told The Australian Financial Review on Friday.

“With over 40 per cent of the supermarkets in the country in the case of Woolworths and over 30 per cent in the case of Coles – two players with over 70 per cent of the market – people can make their own view of whether its a concentrated market.

“We do not want to wake up in five years’ time and find that [Woolworths market share of] 42 per cent has become 50 per cent and it looks like we were asleep at the wheel."

Woolworths has hit back at Sims, accusing him of misrepresenting its views and strategies and even “obstructing" competition with red tape.

“Woolworths has notified and co-operated with the ACCC for many years on acquisitions and will continue to do so in the future," the retailer says. It estimates its share of the grocery market at 36 per cent.

Sims says the watchdog operates on “logic rather than emotion" and insists the stand-off will not affect the way the ACCC deals with Woolworths.

However, it’s not difficult to imagine that Woolworths now faces a tough task achieving clearance for all the 194 new supermarkets and liquor stores it plans to open as part of a strategy to “defend and extend" its share of the market and restore earnings per share growth to an “aspirational" 10 per cent.

Analysts believe the crackdown on creeping acquisitions is unlikely to dent Woolworths’ growth in the short to medium term because the retailer already has an approved pipeline of stores and properties. However, they say it could threaten Woolworths’ longer term growth prospects.

“Over the longer run, a more fractious relationship with the ACCC is probably not a good thing," says CLSA analyst David Thomas.

“It’s unlikely to impact their next two-year plan . . . [longer term] that’s where it gets less easy to pick.

“If we have a more aggressive ACCC you’d expect to have some level of impact, particularly when it comes to acquisitions – it has less ability to restrict greenfield expansion."

Shareholders appear unperturbed and Woolworths shares have held their ground since the dispute with the ACCC emerged on Friday.

However, Thomas says the issue of increasing regulatory scrutiny will be closely monitored, particularly given Woolworths’ stated aim to achieve 3 per cent “space" growth every year.

Other analysts say the ACCC’s new focus on creeping acquisitions could potentially slow Woolworths’ growth.

However, they say the approval process was already slow.

For example, when Woolworths tried to buy a liquor shop in the Launceston suburb of Rocherlea in November last year, it took the ACCC three months to release a statement of issues raising preliminary concerns about the impact on competition in the local market. Woolworths finally gave up in June, withdrawing its request for an informal merger review.

This year, the ACCC has blocked or stymied Woolworths’ plans to buy three hardware stores, one existing supermarket, a development site and five liquor stores. However, it has approved the purchase of 28 hotels, two liquor leases and one hardware store following lengthy reviews.

One analyst says he has no plans to adjust longer term growth forecasts on the back of the Woolworths’ stoush with the ACCC.

“It’s just going to slow them down but I don’t think it stops them," he says.

“They have big teams working on the property development pipeline – it’s too imprecise to work out how much this will slow things down. It’s just one of the approvals they have to go through."

Macquarie Equities analyst Greg Dring says it makes sense for Woolworths to open new stores, rather than focus solely on productivity.

“There’s a very specific attitude at Woolworths to have more space and less productivity than there is at Coles," Dring says.

“If you’re Woolworths and you have a fabulous supply chain the more spokes/stores you have hanging off the hub the more profitable," he says.

“If you have the best demand-based forecasting and replenishment and distribution centre model, the more stores you hang off it the more money you make."